Davenport Lyons creditors set for talks over £13.4m debt

Unsecured creditors of failed firm Davenport Lyons will be offered as little as 10p in the pound on outstanding debts.

A joint administrators’ report for the London practice, which went into administration in April, has revealed the firm owes more than £13.36m to unsecured creditors.

This includes £1.3m to HM Revenue & Customs, more than £6m to the Royal Bank of Scotland, £2.3m to landlords and £2.3m to trade creditors. There is also an outstanding £770,000 owed for professional indemnity insurance.

The report, prepared by Baker Tilly, said that based upon the information currently available, it is estimated unsecured creditors will receive between 10 and 15 pence in the pound. An initial meeting of creditors will be held in London on 4 July.

The full-service firm, which employed 75 people in the heart of the West End of London, was acquired as part of a pre-pack administration in April by London firm Gordon Dadds.

The administrators report said Davenport Lyons had assets amounting to more than £11.5m, of which £3.28m is likely to be realised.

The report explains how the 75-year-old firm, run as a traditional partnership, had chosen to respond to the 2008 recession by being ‘aggressive’, and seeking to pick up talent being released by other firms in an attempt to grow revenue.

In the first few years this worked well, with lateral hires bringing with them large books of business.

Revenues reached a plateau in 2010/11 of £23m, but by 2013/14 that had slipped to £16m, albeit over 10 rather than 12 months.

Profits dipped significantly, from a high of £4.7m in 2010/11 to just £15,000 in 2011/12. The firm made a loss of £73,000 the following year and had already lost £547,000 in the 10 months recorded in 2013/14.

All the time, the reserves in the current account were diminishing, from more than £2m in 2009 to a £3.8m overdraft by April.

Bank debt ‘spiked’ in 2011 to more than £6m and partners were forced to suspend ‘significant’ parts of their drawings in order to pay off debt.

By 2012 and beyond, the report noted, Davenport Lyons ‘was starting to struggle with a significant debt burden and a worsening debt/revenue ratio.

‘People were starting to depart the business more rapidly than before albeit for a wide variety of reasons… this still negatively affected morale and the working environment.’

RBS brought in its own advisers to monitor the situation, while the firm also spent nine months trying to find suitable new trading premises after former leases expired.

In September, the SRA categorised Davenport Lyons as ‘high risk’ and were subject to monitoring from its supervision team which placed a ‘significant, although entirely necessary, time burden’ on the firm. The administrators’ report says that the SRA backed the pre-pack, which avoided the need for statutory intervention. Had the firm been intervened in, the costs would have been borne by the liquidation estate and creditors would have got nothing.

Davenport Lyons started talking with other firms about a merger in autumn 2013, with conversations held with more than 20 firms before the deal with Gordon Dadds.

As well as the debt repayment offer, creditors will also be asked to approve legal and administration costs accrued since April.

Legal fees due to Pinsent Masons are estimated at £51,225, while Baker Tilly has billed £274,642.

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Quite correct, My Lord, the press gets hold of one bad case of default, or negligence, or both and portrays the whole profession in that light. But it is like hospitals in Wales. They are not all bad, but to judge from the media you could be forgiven for thinking they are. And this must add to the claim culture.

But quite what the LS and SRA can do about that is hard to say. Default, especially if deliberate, should perhaps always be reported to the police. In that way the state can pay for the investigation and prison is the likely outcome. That might concentrate one or two minds a little harder.

This firm is by no means typical of a well run legal practice. Trouble is we all get tarred with the same brush, even very small firms. The public does not understand. Can't the Law Society at least try to do something about that?

What were the DL partners thinking about? I would not be able to sleep at night for the past three or four years with liabilities like this. How much did each of them draw over, say, the last five years?

Davenport Lyons was a good firm with some excellent lawyers in it. However, the management, comprising a small cabal of equity partners and their well-paid acolytes, was atrocious. Result: a catastrophic failure that could so easily have been avoided.

"In 2008 an official complaint was made by the Consumers' Association to the Solicitors Regulation Authority (SRA) about Davenport-Lyons' "campaign of letters alleging illegal filesharing".[11]

The case against Davenport Lyons partners David Gore and Brian Miller was the subject of a 7 day hearing at the Solicitors Disciplinary Tribunal (SDT), starting 31 May 2011.[12][13]

On 8 June 2011, the SDT found that all allegations against the pair had been proven. They were fined £20,000 each, ordered to pay interim costs of £150,000, and suspended from practising for three months.[14] The SRA said:

Solicitors have a duty to act with integrity, independence and in the best interests of their clients. Solicitors who breach those duties can expect to face action by the SRA."

I agree that a small number of firms grow large too fast and lose control as a result. However, I think this is rare. Even when experiencing fast growth Managers tend to learn and train quickly if they look at innovative methods for doing so.

Instead of spending excessive time concentrating on persecuting small firms trying to eke out a meagre existence and piling on countless compliance regulations on them, the SRA should spend a little more time monitoring the larger practices, some of which are clearly wildly out of control!

Lateral hires are all very well, but if a firm becomes too large and unwieldy and there are no sufficiently trained business managers with appropriate business acumen at the helm, this type of debacle will be all too prevalent, as we are seeing time and time again!

The SRA weren't quick enough .... again. This situation should not have been allowed to develop to a point where debts of over £13m were chalked up while being supervised. This happened last year when Alexander Lawyers LLP was allowed by the SRA to carry on running up debts while being monitored by the SRA's supervision team. It took a group of determined creditors with help from HMRC to stop the charade. Why is the SRA allowing this sorry state of affairs to continue? If every partner tempted to draw beyond his means feared a speedy SRA intervention such situations would not develop.

Poor reporting from the Gazette and usual prejudiced responses from those who do not understand what has gone. The partners will not get off. This was a traditional partnership with unlimited liability joint and several. The firm's creditors will vote on whether to accept a Partnership Voluntary Arrangement taking 10 pence in the pound, or they can reject it and bankrupt all of the partners. The creditors can recover against the individual partners if they reject the offer put forward, and why would they accept it? Why not take the partners' homes cars etc?

Ashley, DL were relatively small and needed to grow to stay afloat. You can imagine that they had only three options in the current climate: 1. be taken over by a larger firm; 2.lateral hires (hoping to keep the same partners and give them a chance); 3. be swallowed by the ressession.If you are a Partner of a firm what would you choose?

A sad end for all concerned - particularly the creditors. However two elements shine through - lateral hires and management. Laterals are an on-going problem that when fully analysed rarely deliver the expected results. Having examined this over 20+ years it is rare to see any real cash profits in the first two, sometimes three years. Factor in the disruption factors and as a strategy it does not tick the boxes. Add in the management decisions that seem to have been avoided as revenue dried up and it is sorry picture. There was clearly a sense of expectation that 'things would return to normal soon' whereas some hard decision making was required which probably included some ruthless downsizing and far greater attention to performance management. Most of these failures are avoidable if the right advice is sought and, importantly, acted upon.

Davenport Lyons sound like a typical local high street practice don't they? And this is the sort of shenanigans ALL these guys seem to get up to - the public clearly need to be protected from these clever dicks infiltrating our local high streets don't they Mr Law Society!!

As it was run as a traditional partnership there is no reason why the creditors shouldn't pursue the Partners personally and ultimately force them into bankruptcy. As someone else has suggested the SRA should start regulatory proceeding against the Partners for breaches of the core principles.

Anonymous26 June 2014 11:48 am - I think you will find this is the run-off premium payable when a firm ceases. This is a common issue when firms fail and insurers have to provide 6 years' run-off cover. It is one of the important issues which needs to be considered in connection with the PII consultation. See comments on http://www.lawgazette.co.uk/law/pii-changes-threaten-solicitor-brand-says-city-society/1/5041831.article?PageNo=1&SortOrder=dateadded&PageSize=50#comments

it seems pretty obvious that notwithstanding plummeting profits the partners just wouldn't give up the west end lifestyle and had to be 'forced to'. the implosion seemed avoidable had ethical business sense/activity been deployed.

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